Liability lawsuits are unpredictable these days. Juries are increasingly giving outsized awards to plaintiffs, and just about any accident can become prey to unscrupulous – even manufactured – claims of serious injury. While homeowners and personal auto insurance carry liability protection, they most likely aren’t designed to handle a big claim, such as permanent disability.

If you lose a lawsuit that results in a judgment amount that’s larger than your insurance policy covers, the remainder will have to be paid out of pocket. Would you have to dip into savings, retirement accounts, your home’s equity or money set aside for college tuition?

A personal umbrella insurance policy is designed to protect you from such over-the-top financial losses.

The low-cost policy that may save the day

Umbrella insurance is a kind of personal liability insurance that takes over when the liability limit on your standard homeowners, auto or other personal insurance policies is maxed out. An umbrella policy also extends liability coverage if you have a renter’s or condo owner’s policy.

Umbrella policies will not make payments to cover losses to your own property or possessions. Instead, this blanket-like policy provides any additional payment needed – up to the umbrella policy limit – when you are found at fault for someone else’s injury or death or damage to their possessions. Most policies also provide coverage worldwide, with the exception of some foreign homeownership or vehicles titled in another country.

Ultimately, an umbrella policy is an attractive stopgap option, and its premiums are typically much less expensive than the standard primary policies it supports. This is because the umbrella serves as a payment backup; it typically doesn’t come into play with average claims, only very large ones.

A personal umbrella policy protects you as well as your dependents living in your household or those specifically listed on your auto or other personal property policies. In addition, umbrella policies will cover some liability claims that are excluded from most primary policies, including libel, slander, false imprisonment, malicious prosecution, wrongful death, invasion of privacy, and other specific hazards related to non-owned or rented vehicles. Your insurance professional can detail what’s covered and excluded on any policies you consider.

The order of payment

Let’s consider a few scenarios based on the assumption that you have:

• A homeowners policy that includes up to $300,000 in liability protection
• An auto policy with $250,000 in liability coverage
• An umbrella policy with a $1 million limit

If you are held accountable for a $250,000 settlement due to an injury suffered on your property, your homeowners policy would cover the entire amount, and the umbrella policy wouldn’t come into play.

However, if you faced a $1.1 million settlement from a multi-car accident caused by your teenager, your auto policy would cover the first $250,000, and the umbrella policy would pay the remaining $850,000.

As a third scenario, if you were to cause an auto accident while on vacation overseas, your umbrella policy could help cover the excess medical or repair costs of others involved in the accident that aren’t addressed by your rental insurance.

Dovetailing policies

An umbrella policy is not a substitute for getting adequate limits on your primary policies. If you have low limits of coverage on your underlying insurance, your umbrella policy premium will go up to account for this.

In addition, most insurers require minimum liability limits – about $250,000 for auto policies and $300,000 for homeowners policies (these vary by state) – before they will issue an umbrella policy. Most umbrella policies start at $1 million of coverage and go up from there.

The best plan is to purchase the appropriate level of homeowners, auto or other insurance that provides the most comprehensive coverage for your particular situation at an amount suitable to your income and assets – and then rely on the umbrella insurance as a safeguard against catastrophic events.

Talk to your insurance agent about an umbrella’s support of all policies you carry, such as boaters or watercraft insurance, coverage for rental or vacation properties you may own and any home-business insurance you may have. You may find important exclusions.

When shopping for insurance, many individuals purchase all policies from the same company. However, this isn’t a requirement. Your agent can help you compare the offerings of multiple insurers since it can be complicated to review differences between umbrella policies, which can vary dramatically.

A spreadsheet can prove useful for tracking each umbrella policy’s scope of coverage, which is usually defined in broad terms and accompanied by a list of exclusions. There may also be “endorsements,” or additional coverage options, available.

Talk to your agent about your family’s risks, such as a teenage or elderly driver, a swimming pool, a trampoline, a hot tub, a dog that may be listed as a “restricted” breed, etc. Make sure the policy you choose either specifically mentions each risk as being covered or does not list it as an excluded peril.

Be sure to complete a similar review of your primary policy as well so you understand the full scope of protection available. In some instances, an umbrella policy is the only way to protect against a liability that is excluded from most standard policies.

With a little added protection from a personal umbrella insurance policy, you can enjoy everyday life with more peace of mind.

This content is for informational purposes only and not for the purpose of providing professional, financial, medical or legal advice. You should contact your licensed professional to obtain advice with respect to any particular issue or problem. 

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